Hidden service charge issues don’t have to derail your block freehold purchase.
It is not unusual to see service charge apportionments become out of pace with an actual property, particularly when alterations have been made to that property.
During my 17 years in the property management industry, I have frequently come across service charges that can be best described as questionable. These have often been through either inappropriate cost headings and service charge schedules and/or apportionment errors.
As an example of disproportionate charges, a victorian conversion of 12 residential apartments in leafy Hampstead, north London springs to mind. I was asked to review this site by the freeholder after residents had queried the apportionments during handover.
The property appeared to be a straightforward residential block investment for our client. However, upon further inspection of the property during handover to management, the service charge apportionments were no longer perceived as fair and reasonable.
The property had evolved in recent years with many structural changes. An already-large basement apartment had been extended, substantially increasing its floor area. Two neighboring apartments had been knocked through to become one larger living space for the leaseholder. However, the service charge apportionment paid by these properties had not been changed at the time.
The knocked through apartment's percentage of the service charge had remained the same for several years and, in one instance, a studio apartment was paying a similar amount.
To further complicate matters, the extended basement apartment was accessed via its own front door, yet the leaseholder was continuing to pay for cleaning and maintenance costs for the communal hallway that served the remaining apartments.
The leases were ill-written, and the percentages calculated on a square footage basis contained therein were no longer relevant to the structural changes that had been made.
The only way forward was to conduct a full review of the property. I obtained the square footage for all 12 apartments to ensure the correct information was recorded. With this information, we were able to apportion the service charges accordingly. In addition, the internal block maintenance charge was amended to remove the basement apartment, and costs were then apportioned between the remaining apartments. Leaseholders were fully informed of this review and changes to the service charge apportionments.
In making these changes, we came to a more satisfactory approach to the levying of service charges collected on each of the leaseholders for the maintenance of the property.
Therefore, I recommend service charges and their structure and apportionments are reviewed as part of every investment decision.